Student-Loan Debt Slows Recovery

This year featured yet another political battle over student-loan interest rates. But while Congress resolved that matter, it did nothing about exceptionally high loan burdens, which increasingly are weighing on borrowers and likely putting a drag on the recovery.

Undergraduate borrowers who graduated in 2012 owed, on average, $29,400 in student debt, up a staggering 25% from four years earlier, the nonprofit Institute for College Access & Success said. Americans now owe around $1 trillion in student debt, according to the Federal Reserve Bank of New York.

Defaults on those loans are rising. Nearly 12% of all student debt was delinquent by the end of the third quarter, up from 7.6% five years earlier, according to the New York Fed.

The Fed defines delinquent as debt that hasn’t had a payment in at least 90 days. Because that figure includes debt owed by students still enrolled in school and other borrowers who have been allowed to delay payments, the true scope of delinquency is far bigger. Research by the New York Fed in 2012 indicated more than 1 in 5 borrowers whose loans had come due were delinquent.

Officials at the Consumer Financial Protection Bureau have warned that rising student-loan defaults are damaging borrowers’ credit, likely making it harder for former students now starting careers to obtain mortgages, car loans and other types of financing that boost consumer spending and fuel economic growth.

Economists generally agree that student debt isn’t a systemic threat to the U.S. economy. At $1 trillion, student debt outstanding is a fraction of the roughly $10 trillion Americans had accumulated in mortgage debt at the peak of the housing bubble. And while many student borrowers are falling behind, most are still making payments on time.

But growing student-loan defaults likely are subtly weighing on a U.S. recovery that needs all the momentum it can get to break out of a historically sluggish pace.

The pain experienced by individual borrowers could raise pressure on Congress to ease the burden. The Obama administration has moved to expand an optional program that sets student-debt payments as a percentage of a borrower’s debt and then forgives the balance after a number of years of on-time payments. Some academics have discussed making such a program automatic for all borrowers.

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